<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC
20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 27, 1998 Commission File No. 1-11261
SONOCO PRODUCTS COMPANY
----------
Incorporated under the laws I.R.S. Employer Identification
of South Carolina No. 57-0248420
Post Office Box 160
Hartsville, South Carolina 29551-0160
Telephone: 843-383-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock at November 1, 1998:
Common stock, no par value: 101,604,672
<PAGE> 2
SONOCO PRODUCTS COMPANY
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - September 27,
1998 and December 31, 1997
Condensed Consolidated Statements of Income - Three
Months and Nine Months Ended September 27, 1998 and
September 28, 1997
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 27, 1998 and September 28,
1997
Notes to Condensed Consolidated Financial Statements
Report of Independent Accountants
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE> 3
SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
(unaudited)
September 27, December 31,
1998 1997
Assets ------------- ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 46,901 $ 53,600
Trade accounts receivable, net of allowances 326,895 289,991
Other receivables 26,968 12,463
Inventories:
Finished and in process 98,207 94,785
Materials and supplies 125,815 115,313
Prepaid expenses 27,566 25,265
Deferred income taxes 8,988 63,041
Net assets held for sale 13,755 218,582
----------- -----------
675,095 873,040
Property, Plant and Equipment, Net 1,011,908 939,542
Cost in Excess of Fair Value of Assets Purchased, Net 164,013 144,097
Other Assets 261,909 220,186
----------- -----------
Total Assets $ 2,112,925 $ 2,176,865
=========== ===========
Liabilities and Shareholders' Equity
Current Liabilities
Payable to suppliers $ 173,782 $ 161,078
Accrued expenses and other 128,565 106,839
Accrued wages and other compensation 13,557 22,689
Notes payable and current portion of long-term debt 154,653 99,690
Taxes on income 14,703 43,848
----------- -----------
485,260 434,144
Long-Term Debt 614,112 696,669
Postretirement Benefits Other than Pensions 95,101 100,094
Deferred Income Taxes and Other 113,401 97,139
Shareholders' Equity
Serial preferred stock, no par value
Authorized 30,000 shares
0 shares issued and outstanding at September 27, 1998
and December 31, 1997 0 0
Common stock, no par value
Authorized 150,000 shares
101,588 and 105,417(1) shares issued and outstanding
at September 27, 1998 and December 31, 1997, respectively 7,175 7,175
Capital in excess of stated value 421,471 198,271
Accumulated other comprehensive income (88,157) (91,420)
Retained earnings 464,562 734,793
----------- -----------
Total shareholders' equity 805,051 848,819
----------- -----------
Total Liabilities and Shareholders' Equity $ 2,112,925 $ 2,176,865
=========== ===========
</TABLE>
(1) Restated to reflect the 10% common stock dividend on June 10, 1998.
See accompanying Notes to Condensed Consolidated Financial Statements
<PAGE> 4
SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(Dollars and shares in thousands except per share)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- -----------------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1998 1997 1998 1997
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 606,981 $ 709,588 $ 1,917,905 $ 2,111,403
Cost of sales 467,703 556,181 1,475,327 1,639,879
Selling, general and administrative expenses 66,786 72,983 196,119 220,518
Net gain on sale of divested assets -- -- 85,360 --
--------- --------- ----------- -----------
Income before interest and taxes 72,492 80,424 331,819 251,006
Interest expense 13,256 13,982 40,490 42,420
Interest income (1,511) (1,308) (4,282) (3,337)
--------- --------- ----------- -----------
Income from operations before income taxes 60,747 67,750 295,611 211,923
Taxes on income 22,647 26,070 139,747 81,865
--------- --------- ----------- -----------
Income from operations before equity in earnings
of affiliates/Minority interest in subsidiaries 38,100 41,680 155,864 130,058
Equity in earnings of affiliates/Minority
interest in subsidiaries 1,639 215 4,311 (886)
--------- --------- ----------- -----------
Net income before extraordinary loss 39,739 41,895 160,175 129,172
Extraordinary loss from early extinguishment
of debt, net of income tax benefit -- -- 11,753 --
--------- --------- ----------- -----------
Net income 39,739 41,895 148,422 129,172
Preferred dividends -- (648) -- (3,061)
--------- --------- ----------- -----------
Net income available to common shareholders $ 39,739 $ 41,247 $ 148,422 $ 126,111
========= ========= =========== ===========
Average common shares outstanding*:
Basic 101,976 100,190 102,988 99,476
Assuming conversion of preferred stock -- 4,928 -- 5,283
Assuming exercise of options 1,171 2,826 1,776 2,559
--------- --------- ----------- -----------
Diluted 103,147 107,944 104,764 107,318
========= ========= =========== ===========
</TABLE>
* Restated to reflect the 10% common stock dividend on June 10, 1998.
See accompanying Notes to Condensed Consolidated Financial Statements
<PAGE> 5
SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited), continued
(Dollars and shares in thousands except per share)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- -----------------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1998 1997 1998 1997
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Per common share
Net income available to common shareholders*:
Basic, before extraordinary loss $ .39 $ .41 $ 1.55 $ 1.27
Extraordinary loss - - (.11) -
----- ----- ------ ------
Basic $ .39 $ .41 $ 1.44 $ 1.27
===== ===== ====== ======
Diluted, before extraordinary loss $ .39 $ .39 $ 1.53 $ 1.20
Extraordinary loss - - (.11) -
----- ----- ------ ------
Diluted $ .39 $ .39 $ 1.42 $ 1.20
===== ===== ====== ======
Dividends per common share* $ .18 $.164 $ .524 $ .478
===== ===== ====== ======
</TABLE>
* Restated to reflect the 10% common stock dividend on June 10, 1998.
See accompanying Notes to Condensed Consolidated Financial Statements
<PAGE> 6
SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------
September 27, September 28,
1998 1997
------------- -------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 148,422 $ 129,172
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 102,347 112,729
Equity in earnings of affiliates/Minority interest in subsidiaries (4,311) 886
Deferred taxes 54,053 5,329
Net (gain) loss on disposition of assets (86,535) 4,460
Changes in assets and liabilities, net of effects from acquisitions,
dispositions and foreign currency adjustments:
Accounts receivable (37,293) (18,850)
Inventories (12,795) 4,995
Prepaid expenses (965) 5,694
Payables and taxes 14,412 (5,300)
Other assets and liabilities (31,283) (13,571)
--------- ---------
Net cash provided by operating activities 146,052 225,544
--------- ---------
Cash Flows From Investing Activities:
Purchase of property, plant and equipment (154,928) (162,176)
Cost of acquisitions, exclusive of cash (72,524) (17,647)
Proceeds from the sale of assets 296,861 70,872
Other, net (1,614) (5,591)
--------- ---------
Net cash provided (used) by investing activities 67,795 (114,542)
--------- ---------
Cash Flows From Financing Activities:
Proceeds from issuance of debt 144,008 52,371
Principal repayment of debt (155,269) (50,143)
Net decrease in commercial paper borrowings (13,500) (91,891)
Cash dividends (53,736) (50,466)
Common shares acquired (169,080) (137)
Common shares issued 27,362 15,677
--------- ---------
Net cash used by financing activities (220,215) (124,589)
--------- ---------
Effects of exchange rate changes on cash (331) (559)
--------- ---------
Net Decrease in Cash and Cash Equivalents (6,699) (14,146)
Cash and cash equivalents at beginning of period 53,600 71,260
--------- ---------
Cash and cash equivalents at end of period $ 46,901 $ 57,114
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
<PAGE> 7
SONOCO PRODUCTS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited), continued
(Dollars in thousands)
Supplemental Cash Flow Disclosures:
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
September 27, September 28,
1998 1997
------------- -------------
<S> <C> <C>
Interest paid $35,785 $34,988
Income taxes paid $79,190 $72,276
</TABLE>
Non-Cash Transaction:
On June 10, 1998, the Company issued a 10% common stock dividend ($364,917 fair
value).
See accompanying Notes to Condensed Consolidated Financial Statements
<PAGE> 8
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1: Basis of Interim Presentation
In the opinion of the Company, the accompanying unaudited
condensed consolidated statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to
present fairly the consolidated financial position, results of
operations, and cash flows for the interim periods reported
hereon. Operating results for the three and nine months ended
September 27, 1998, are not necessarily indicative of the
results that may be expected for the year ending December 31,
1998. These condensed consolidated financial statements should
be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's
annual report for the fiscal year ended December 31, 1997.
The December 31, 1997 condensed consolidated balance sheet
data was derived from audited financial statements, but does
not include all disclosures required by generally accepted
accounting principles.
Note 2: Dividend Declarations
On July 15, 1998, the Board of Directors declared a regular
quarterly dividend of $.18 per share. This 293rd consecutive
quarterly dividend was paid September 10, 1998, to all
shareholders of record August 21, 1998.
On October 22, 1998, the Board of Directors declared a regular
quarterly dividend of $.18 per share payable December 10,
1998, to all shareholders of record November 20, 1998.
Note 3: Acquisitions/Dispositions
During the first quarter of 1998, Sonoco completed two
acquisitions in the Company's Industrial Packaging segment. In
February, the Burk family of companies was acquired. Burk,
with annual sales of approximately $19 million, is a
manufacturer of injection molded and extruded plastic products
and consists of three manufacturing facilities in Germany. In
March 1998, Sonoco completed the acquisition of the La
Rochette group. This acquisition included four converting
operations and a paper mill in France with annual sales of
approximately $50 million.
Early in the second quarter of 1998, Sonoco completed the
previously announced sale of the Consumer Packaging segment's
North American pressure-sensitive labels operations. The sale
included seven label facilities in the United States and one
in Mexico. The sale of the labels operations resulted in a
after-tax charge in the fourth quarter of 1997 of $174.5
million, and an additional after-tax charge of $13.5 million
(approximately $19.2 million before tax) upon completion of
the sale. Also early in the second quarter, Sonoco completed
the previously announced sale of the fibre and plastic drums
portion of the Industrial Packaging segment's industrial
containers operations resulting in a one-time, after-tax gain
of approximately $40 million (approximately $104.6 million
before tax). The sale of the remaining portion of Sonoco's
industrial containers business, intermediate bulk containers,
consisting of a plant in Lavonia, Georgia, has not closed. The
Company expects to complete the sale in the fourth quarter of
1998.
<PAGE> 9
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited)
Note 3: Acquisitions/Dispositions, continued
Also during the second quarter of 1998, Sonoco sold its
Hamilton Hybar subsidiary, a manufacturer of protective roll
wrap for the paper industry, for $22 million in cash. The
operation was sold to Cascades Sonoco, Inc., a joint venture
in which Sonoco is a 50% owner.
During the third quarter of 1998, Sonoco purchased the 50%
share of its joint-venture partner in Coretech-Sonoco, a paper
mill core manufacturer in Canada, and in a Montreal-based
recycled paperboard mill whose production is primarily
dedicated to Coretech-Sonoco. The purchase included eight
converting operations in Ontario and Quebec, and a paper mill
with the capacity to produce 40,000 tons per year. The annual
sales of these operations, amounting to $33 million, have
previously been consolidated into Sonoco's total sales due to
effective control, with 50% of the net earnings recorded as
minority interest.
Note 4: Extraordinary Loss from Early Extinguishment of Debt
At the beginning of the second quarter of 1998, the company
tendered for any and all of its 9.20% Debentures due August 1,
2021. The fixed spread offer to purchase the debentures, which
expired on April 14, 1998, resulted in an extraordinary charge
against earnings in the second quarter of $11.8 million (after
a $7.5 million income tax benefit), reflecting the tender of
$58.7 million principal amount of the $100 million issue.
Note 5: Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting
Comprehensive Income". Accordingly, the shareholders' equity
section of the Condensed Consolidated Balance Sheets has been
modified to comply with the new requirements.
The following table provides a reconciliation from net income
available to common shareholders to comprehensive income
(dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- -----------------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1998 1997 1998 1997
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net income available to
common shareholders $ 39,739 $ 41,247 $148,422 $ 126,111
Other comprehensive income:
Foreign currency translation
adjustments (528) (7,539) 3,263 (24,568)
--------- --------- -------- ---------
Comprehensive Income $ 39,211 $ 33,708 $151,685 $ 101,543
========= ========= ======== =========
</TABLE>
<PAGE> 10
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited)
Note 5: Comprehensive Income, continued
The following table summarizes the components of the
year-to-date change in the accumulated other comprehensive
income balances (dollars in thousands):
<TABLE>
<CAPTION>
Foreign Minimum Accumulated
Currency Pension Other
Translation Liability Comprehensive
Adjustments Adjustment Income
----------- ---------- -------------
<S> <C> <C> <C>
Balance at January 1, 1998 $ (86,407) $ (5,013) $ (91,420)
Year-to-date change 3,263 -- 3,263
--------- -------- ---------
Balance at September 27, 1998 $ (83,144) $ (5,013) $ (88,157)
========= ======== =========
</TABLE>
Note 6: Financial Segment Information
The Financial Segment Information provided below should be
read in conjunction with the Management's Discussion and
Analysis immediately following the Notes to Condensed
Consolidated Financial Statements.
FINANCIAL SEGMENT INFORMATION (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- ------------------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1998 1997 1998 1997
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net Sales
Industrial Packaging $ 334,399 $ 395,975 $ 1,077,916 $ 1,178,786
Consumer Packaging 272,582 313,613 839,989 932,617
--------- --------- ----------- -----------
Consolidated $ 606,981 $ 709,588 $ 1,917,905 $ 2,111,403
========= ========= =========== ===========
Operating Profit
Industrial Packaging $ 45,436 $ 50,480 $ 155,295 $ 160,683
Consumer Packaging 27,056 29,944 91,164 90,323
Net gain on sales of divested assets -- -- 85,360 --
Interest, net (11,745) (12,674) (36,208) (39,083)
--------- --------- ----------- -----------
Consolidated $ 60,747 $ 67,750 $ 295,611 $ 211,923
========= ========= =========== ===========
</TABLE>
<PAGE> 11
SONOCO PRODUCTS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(unaudited)
Note 7: New Accounting Pronouncements
On March 4, 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for
Internal Use" (SOP 98-1). Management of the Company does not
expect SOP 98-1, which is effective for all fiscal years
beginning after December 15, 1998, to have a material effect
on the Company's results of operations or its financial
position.
On June 15, 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
(FAS 133). FAS 133 is effective for all fiscal years beginning
after June 15, 1999 and requires that all derivative
instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a
hedge transaction and, if it is, the type of hedge
transaction. Management of the Company anticipates that, due
to its limited use of derivative instruments, the adoption of
FAS 133 will not have a significant effect on the Company's
results of operations or its financial position.
Note 8: Subsequent Event
On November 10, 1998, Sonoco announced that it expects to
record after-tax charges of approximately $20-25 million in
the fourth quarter ending December 31, 1998, related to
headcount reductions and asset write-offs as a result of five
plant closings and workforce reductions in administrative
areas. The five plant closings included paper mills in
Amsterdam, New York, and Terrebonne, Quebec, a molded plastics
plant in Greensboro, North Carolina, and composite can
facilities in Kansas City, Missouri, and Plymouth, Wisconsin.
Workforce reductions of 125 salaried and 250 hourly employees
were made. The Company expects a significant portion of the
charges to be offset by the gain associated with the
previously reported dispositions of its industrial containers
and labels businesses.
<PAGE> 12
Report of Independent Accountants
To the Shareholders and Directors of Sonoco Products Company
We have reviewed the accompanying condensed consolidated balance sheet of Sonoco
Products Company as of September 27, 1998, and the related condensed
consolidated statements of income and cash flows for the three- and nine-month
periods then ended. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet at December 31, 1997, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the year then ended (not presented herein); and in our report dated
January 30, 1998, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1997, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/PricewaterhouseCoopers LLP
-----------------------------
PricewaterhouseCoopers LLP
Charlotte, North Carolina
November 11, 1998
<PAGE> 13
SONOCO PRODUCTS COMPANY
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Unaudited)
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations that are not historical in nature, are
intended to be, and are hereby identified as "forward looking statements" for
purposes of the safe harbor provided by section 21E of the Securities Exchange
Act of 1934, as amended. The Company cautions readers that forward looking
statements, including without limitation those relating to the Company's future
business prospects, revenues, working capital, liquidity, capital needs,
interest costs, income, and successful implementation of the Year 2000 Plan, are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those indicated in the forward looking statements.
Third Quarter 1998 Compared with Third Quarter 1997
Results of Operations
Consolidated net sales for the third quarter of 1998 were $607.0 million,
compared with pro forma sales of $605.2 million from ongoing operations in the
third quarter of 1997. Last year's reported third quarter sales totaled $709.6
million and included sales from the company's previously owned North American
labels operation and the fibre and plastic drums portion of the industrial
containers business. Both operations were sold at the beginning of the second
quarter of this year. The reported third quarter 1997 sales figure also included
sales for the fibre partitions operations that became part of a joint venture
with Rock-Tenn Company in the third quarter of 1997 and the Hamilton Hybar
operations that were sold in May 1998 to the Cascades Sonoco, Inc., joint
venture. In August 1998, the company announced an agreement with Georgia-Pacific
whereby Sonoco will operate its corrugating medium machine located in
Hartsville, South Carolina, on a fixed management fee basis. This was previously
under a 50/50 equity arrangement. No sales are reported under the new
arrangement.
Net income for the third quarter of 1998 was $39.7 million, compared with $41.9
million for the same period in 1997. On a comparable basis, net income from
ongoing operations for this year's third quarter was $39.7 million, compared
with $40.6 million for the third quarter last year. Sonoco reported third
quarter earnings of $.39 per diluted share in both 1998 and 1997.
Industrial Packaging Segment
The industrial packaging segment for the third quarter of 1998 included tubes,
cores and cones; molded plugs and related products and services; injection
molded and extruded plastics; paper manufacturing; recovered paper operations;
protective packaging; reels for wire and cable packaging; adhesives; converting
machinery; and forest products.
Third quarter sales for the industrial packaging segment were $334.4 million,
compared with $396.0 million in last year's third quarter. Third quarter 1997
sales included $71.4 million for the following operations that were not included
in third quarter 1998 sales: the fibre and plastic drums portion of the
industrial containers business; the fibre partitions operations; Hamilton Hybar;
and the corrugating medium operation in Hartsville. Operating profit for this
segment was $45.4 million, compared with the reported $50.5 million in the third
quarter of 1997. Operating profits from non-divested businesses were $45.7
million in the third quarter of 1997.
<PAGE> 14
SONOCO PRODUCTS COMPANY
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Unaudited), continued
Third Quarter 1998 Compared with Third Quarter 1997, continued
Results of Operations, continued
During the third quarter of 1998, volume increased over last year's all-time
high levels in the global industrial-based engineered carriers business (tubes,
cores and cones) led by increased sales of papermill cores and carpet yarn
tubes. However, volume in the tube and core business declined from this year's
first quarter, reflecting in part direct and indirect effects of the economic
crisis in Asia on European and domestic demand. The ability to not only provide
customers with cores and tubes but to also supply a variety of ancillary
products and services is helping Sonoco serve customers who are looking to
consolidate their supplier bases.
Sonoco's molded and extruded plastics operations had strong volume in the
filtration and automotive markets, but overall volume was down modestly because
of declines in sales to the quick-service restaurant, textile, and wire markets.
Volume in the nailed wood, plywood and metal reels operations remained at
healthy levels in the third quarter of 1998, and volume increased in the
protective packaging operations, which primarily supply major appliance
manufacturers.
Consumer Packaging Segment
The consumer packaging segment in the third quarter of 1998 included composite
cans; plastic and fibre cartridges; capseals; flexible packaging; high density
film products; paperboard cartons; coasters and glass covers; and packaging
services.
Third quarter sales were $272.6 million, compared with $313.6 million in the
same quarter of 1997. Last year's results included approximately $33.0 million
in sales from the North American labels business, which was sold at the
beginning of the second quarter of 1998. Operating profits for this segment
during the third quarter were $27.1 million, compared with $29.9 million
reported in the same period a year ago. Operating profits from non-divested
businesses were $29.0 million in the third quarter of 1997.
In the company's global composite can operations, volume in the snack food
sector declined modestly during the third quarter compared with the same quarter
last year. As noted in the first quarter of 1998, the frozen juice concentrate
market has declined due to ready-to-serve juices and non-refrigerated juice
concentrates taking market share from frozen concentrates.
Operating profits in the high density film products operations were higher in
the third quarter of 1998 than in the same period last year as a result of
increases in volume and decreases in resin prices. These were partially offset
by lower selling prices.
Sonoco's flexible packaging operations experienced significant volume increases
in the third quarter of 1998, compared with the same period last year. Operating
profits were higher due largely to productivity improvements from reduced scrap,
improved run speeds, and faster changeovers.
<PAGE> 15
SONOCO PRODUCTS COMPANY
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Unaudited), continued
September 1998 Year-to-Date Compared with September 1997 Year-to-Date
Results of Operations
Consolidated net sales for the first nine months of 1998 were $1.9 billion,
compared with $2.1 billion in the first nine months of 1997. On a comparable
basis, sales from ongoing operations for the first nine months of 1998 were $1.9
billion compared to $1.9 billion for the same period last year. Reported
year-to-date net income, including certain one-time transactions, was $148.4
million. Excluding the one-time transactions, 1998 year-to-date net income was
$133.6 million, a 3.4% increase over the $129.2 million recorded in the prior
year. These one-time transactions included an after-tax gain of $40 million
resulting from the sale of Sonoco's fibre drum and plastic drum operations and a
$13.5 million after-tax charge in the second quarter relating to the disposition
of former Engraph operations. Net income also included the effect of an
extraordinary, after-tax loss of $11.8 million resulting from the repurchase of
$58.7 million of 9.2% debentures. The company had expected to record a $55
million gain from the sale of its industrial containers businesses in this
year's second quarter versus the $40 million actually recognized. However, the
sale of the intermediate bulk container operations has not been finalized. The
Company expects the sale to be completed in the fourth quarter of 1998. Sonoco
reported 1998 year-to-date earnings of $1.42 per diluted share, including the
impact of these one-time transactions. Excluding these one-time transactions,
year-to-date earnings per diluted share were $1.28 in 1998, a 6.7% increase over
the $1.20 recorded for the same period in 1997.
The company's global tube, core, and cone operations continued to lead the
company's performance with volume gains over the first nine months of last year,
while productivity gains in nearly all operations contributed to enhanced
profitability for the first nine months of the year.
Industrial Packaging Segment
Trade sales for the industrial packaging segment for the first nine months of
1998 were $1.1 billion, compared with $1.2 billion in the first nine months of
1997. Prior year's sales included $143.0 million for the following operations
that were not included in third quarter 1998 sales: the fibre and plastic drums
portion of the industrial containers business; the fibre partitions operations;
Hamilton Hybar; and the corrugating medium operation in Hartsville. Operating
profits for this segment in the first nine months of 1998, excluding one-time
charges, was $155.3 million, compared with the reported $160.7 million in the
first nine months of 1997. Operating profits from non-divested businesses were
$148.3 million in the first nine months of 1997.
Volume in the global tube and core operations remained strong compared with a
year ago. Material price changes have been offset by changes in selling prices.
<PAGE> 16
SONOCO PRODUCTS COMPANY
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Unaudited), continued
September 1998 Year-to-Date Compared with September 1997 Year-to-Date
Results of Operations, continued
Consumer Packaging Segment
Trade sales for the consumer packaging segment in the first nine months of 1998
were $840.0 million, compared with $932.6 million reported in the same period of
1997. Last year's sales included approximately $77.4 million from the following
divested operations: the screen print operations, sold at the end of last year's
first quarter; and the North American labels operations, divested at the
beginning of the second quarter of 1998. Operating profits in this segment,
excluding one-time charges, increased to $91.2 million for the first nine months
of 1998, compared with $90.3 million during the same period last year.
The company's global composite can operations remain strong. Volume increases in
the snack food market were offset by weakness in the frozen concentrate market.
Operating profits in the high density film products operations were higher in
the first nine months of 1998 compared with the same period last year led by
volume increases in both the grocery and retail markets. Sales prices, however,
declined over last year and more than offset the benefit of lower resin costs.
Volume increased in the company's flexible packaging operations in both the
confectionery and liners markets. Productivity improvements from reduced scrap,
improved run speeds, and faster changeovers also contributed to this group's
improved performance over the first nine months of 1997.
Corporate
General corporate expenses have been allocated as operating costs to each of the
segments. Year to date interest expense was lower in the first nine months of
1998 compared with the same period in 1997 due to the lower average borrowings
resulting from the repurchase of $58.7 million of 9.2% debentures and the
reduction of commercial paper borrowings with a portion of the proceeds from the
sale of the North American labels and fibre and plastic drum operations.
Financial Position, Liquidity and Capital Resources
The Company's financial position remained strong through the first nine months
of 1998. The debt-to-capital percentage, after adjusting debt levels for excess
cash related to the issuance of restricted purpose bonds, was 46.2% at September
27, 1998, compared to 46.1% at December 31, 1997. Shareholder's equity decreased
as a result of shares repurchased under a $150 million stock repurchase program
implemented in January 1998, and other previously authorized programs. From
January 1, 1998, through the end of the third quarter, a total of 5,179,541
shares had been repurchased under these programs at a total cost of $169.1
million for an average price of $32.64 per share.
Working capital decreased $249.1 million to $189.8 million during the first nine
months of 1998. The reduction is primarily attributable to the sales of the
North American labels and fibre and plastic drum operations in the second
quarter of 1998. The proceeds from these sales were used primarily to repurchase
the Company's common stock and to reduce debt. Increases in accounts receivable
and inventory due to acquisitions and ongoing business activity partially offset
the working capital reduction from the completion of the sales.
<PAGE> 17
SONOCO PRODUCTS COMPANY
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Unaudited), continued
September 1998 Year-to-Date Compared with September 1997 Year-to-Date
Financial Position, Liquidity and Capital Resources, continued
The Company expects internally generated cash flows along with borrowings
available under its commercial paper and other existing credit facilities to be
sufficient to meet operating and normal capital expenditure requirements.
Subsequent Event
On November 10, 1998, Sonoco announced that it expects to record after-tax
charges of approximately $20-25 million in the fourth quarter ending December
31, 1998, related to headcount reductions and asset write-offs as a result of
five plant closings and workforce reductions in administrative areas. The
Company expects a significant portion of the charges to be offset by the gain
associated with the previously reported dispositions of its industrial
containers and labels businesses. The Company anticipates annualized after-tax
savings of $10 million beginning in 1999 resulting from these plant closings and
reductions in administrative costs.
Year 2000 Readiness Disclosure and Euro Compliance
The "Year 2000 issue" relates to the inability of certain computerized
information and production systems to properly recognize and process date
sensitive information. This is due to the fact that most of the world's computer
hardware and software have historically used only two digits to identify the
year, resulting in the computers' inability to distinguish between dates in the
1900's and dates in the 2000's.
In May 1997, the Company adopted a Year 2000 Plan ("Plan") to identify and
address the Company's various Year 2000 issues throughout its domestic and
international operations, including financial and administrative systems,
process control and operating systems and information systems infrastructure.
The Plan provides for six phases: (i) an inventory of all systems that might be
affected by the Year 2000; (ii) assessment of Year 2000 readiness of each
application identified in the inventory; (iii) planning for corrective action,
which includes reviewing and prioritizing the various corrective actions based
on their relative impact on the Company's operations and profitability; (iv)
initiation of corrective actions to replace or repair systems that are not Year
2000 compliant; (v) testing the new, upgraded or repaired systems; and (vi)
implementation of tested systems and post-implementation support, including
contingency plans for those systems most critical to the Company's ongoing
operations and/or most at risk to fail. The Plan is being implemented on a
Company-wide basis under the direction of the Information Services Department in
cooperation with senior management and with the review of the Board of Directors
through its Audit Committee.
The Company has completed the inventory, assessment and planning phases for
substantially all of its material systems that may involve a Year 2000 issue.
Based on the information developed, the Company estimates that the total cost of
achieving Year 2000 compliance in substantially all of its information
technology and production systems will be approximately $30 million, of which
$21 million has been spent through September 27, 1998, a portion of which was
capitalized and will be amortized to earnings in future periods. Management
anticipates that the remainder will be spent in the fourth quarter of 1998 and
the first three quarters of 1999. Management believes that the total cost of
achieving Year 2000 compliance will not have a material impact on the Company's
financial condition or results of operations. However, the Company currently is
in the process of initiating corrective actions and testing the new, upgraded or
repaired systems. The Company may need to take additional corrective
<PAGE> 18
SONOCO PRODUCTS COMPANY
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Unaudited), continued
Year 2000 Readiness Disclosure and Euro Compliance, continued
action arising out of the results of the testing, the costs of which it cannot
yet predict. Testing of material systems is scheduled to be completed in the
second quarter of 1999.
The Company is deploying its internal and external resources to install and test
new or upgraded equipment necessary to address the Year 2000 issues in its North
American and international operations. Management believes its existing
personnel and outside resources are sufficient to implement the Plan on a timely
basis, assuming that no unanticipated delays are encountered.
The Company's facilities utilize various control systems to monitor and regulate
production operations. Although the production impact of a Year 2000 related
failure varies significantly among the facilities, any such failure could cause
manufacturing delays or similar inefficiencies. Due to the decentralized nature
of its operations, however, management believes the potential impact of such a
failure would be isolated to the affected facility. In most cases, production
could be shifted to other Company facilities that have similar production
capabilities and capacity until the Year 2000 issue is remedied. It is not
possible to predict the reasonable likelihood of such an event occurring or the
related financial impact. Based on information developed to date, the Company
does not believe it has a significant amount of software imbedded in its
production equipment that is date dependent. The Company is continuing to
inventory its equipment for imbedded software and, consequently, may find
additional software that requires correction. The Company intends to have
contingency plans for its production facilities and equipment finalized by the
third quarter of 1999.
The Company also maintains a wide variety of administrative and financial
applications that require corrective actions to handle Year 2000 dates. The
Company is in the process of installing and testing new, more centralized
software systems throughout its North American operations that are designed to
address Year 2000 issues. Management anticipates that the implementation of
these systems will be complete within the time frames established by the Plan.
Such applications generally are decentralized in the Company's international
operations. Consequently, any Year 2000 failure would be isolated to a single
facility or operation. In most instances, the Company has the ability to run
these applications off-line with the assistance of additional Company personnel,
if necessary.
The Company relies on third party suppliers for certain raw materials,
utilities, transportation and other key services. Under the Plan, the Company
has initiated efforts to evaluate the Year 2000 readiness of its key suppliers
so that it can make contingency plans to reduce risks of disruption in its
production and delivery processes. Paper, the Company's primary raw material, is
produced internally; therefore, the Company believes it will not be subject to
many of the risks attendant to companies that are substantially dependent on
third party suppliers for raw materials. The Company has surveyed its key
suppliers in order to determine their Year 2000 readiness. To date,
approximately 37% of those suppliers have responded to the surveys. All
respondents have indicated that they are, or reasonably believe they will be,
Year 2000 compliant with respect to operations that impact the Company.
Although possible Year 2000 interruptions in customers' operations could result
in reduced sales, increased inventory or receivable levels and reduction in cash
flow, the Company believes that its customer base is broad enough to minimize
the effects of such occurrences. Nevertheless, the Company is taking steps to
monitor the status of its more significant customers in order to devise adequate
contingency plans where necessary.
<PAGE> 19
SONOCO PRODUCTS COMPANY
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Unaudited), continued
Year 2000 Readiness Disclosure and Euro Compliance, continued
There is a risk that the Company's plan for achieving Year 2000 compliance may
not be completed on time, particularly in certain of the Company's European
operations that are more dependent on third parties and for which information is
still being developed. However, the Company anticipates that if one or more
milestones is not met with respect to any system, the Plan timetable will
provide adequate advance notice to permit the Company to take those steps
necessary to implement alternative plans, which could include taking the system
off-line temporarily, stockpiling inventories of raw materials or finished
goods, or devoting additional Company personnel to resolve or substantially
mitigate the issues. The Company also is examining the extent to which its
insurance coverages may protect against or offset Year 2000 related risks.
On January 1, 1999, 11 of the 15 member countries of the European Union are
scheduled to establish fixed conversion rates between their existing currencies
and the euro and to adopt the euro as their common legal currency (the "Euro
Conversion"). Although the Company is currently unsure of the total potential
impact that the Euro Conversion will have on its business, financial condition
and results of operations, particularly as it relates to the Company's European
operations, the Company does not anticipate the Euro Conversion will have a
material adverse effect on the Company. The corrective actions that the Company
is taking to address Year 2000 issues with respect to its European operations
already include changes in its administrative and financial applications
necessary to deal with the Euro Conversion at an immaterial incremental cost.
The estimates and conclusions herein contain forward-looking statements and are
based on management's best estimates of future events. Risks to completing the
Plan include the availability of resources, the Company's ability to discover
and correct the potential Year 2000 sensitive problems which could have a
serious impact on specific systems or facilities, and the ability of suppliers
to bring their systems into Year 2000 compliance.
<PAGE> 20
SONOCO PRODUCTS COMPANY
PART II. OTHER INFORMATION
Item 5. Other Information
a. On November 10, 1998, Sonoco announced that it expects
to record after-tax charges of approximately $20-25
million in the fourth quarter ending December 31, 1998,
related to headcount reductions and asset write-offs as
a result of five plant closings and workforce reductions
in administrative areas. The five plant closings
included paper mills in Amsterdam, New York, and
Terrebonne, Quebec, a molded plastics plant in
Greensboro, North Carolina, and composite can facilities
in Kansas City, Missouri, and Plymouth, Wisconsin.
Workforce reductions of 125 salaried and 250 hourly
employees were made. The Company expects a significant
portion of the charges to be offset by the gain
associated with the previously reported dispositions of
its industrial containers and labels businesses. The
Company anticipates annualized after-tax savings of $10
million beginning in 1999 resulting from these plant
closings and reductions in administrative costs.
b. A shareholder proposal to be presented at the next
Annual Meeting of shareholders of the Company must be
received by the Company not later than November 13,
1998, in order to be included in the Company's Proxy
Statement and Proxy pursuant to Rule 14a-8 of the rules
of the Securities and Exchange Commission. To be voted
on at the Annual Meeting, all shareholder proposals
other than proposals made by the Board of Directors must
be submitted to the Company in writing not later than
January 30, 1999 in order to be voted on at the meeting.
With respect to any shareholder proposal not received by
the Company prior to January 27, 1999, proxies solicited
by management of the Company will be voted on the
proposal in the discretion of the designated proxy
agents.
Item 6. Exhibits and Reports on Form 8-K
Exhibit (27) - Financial Data Schedule (for SEC use only)
<PAGE> 21
S O N O C O P R O D U C T S C O M P A N Y
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SONOCO PRODUCTS COMPANY
---------------------------------
(Registrant)
Date: November 11, 1998 By: /s/ F. T. Hill, Jr.
---------------------------- ------------------------------
F. T. Hill, Jr.
Vice President and
Chief Financial Officer
<PAGE> 22
SONOCO PRODUCTS COMPANY
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
27.398 Financial Data Schedule for the third
quarter of 1998 (for SEC use only)
27.397 Financial Data Schedule for the third
quarter of 1997 (for SEC use only)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SONOCO PRODUCTS FOR THE NINE MONTHS ENDED SEPTEMBER 27,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-27-1998
<CASH> 29,399
<SECURITIES> 17,502
<RECEIVABLES> 359,707
<ALLOWANCES> 5,844
<INVENTORY> 224,022
<CURRENT-ASSETS> 690,589
<PP&E> 1,938,617
<DEPRECIATION> 926,709
<TOTAL-ASSETS> 2,128,419
<CURRENT-LIABILITIES> 500,754
<BONDS> 614,112
0
0
<COMMON> 7,175
<OTHER-SE> 797,876
<TOTAL-LIABILITY-AND-EQUITY> 2,128,419
<SALES> 1,917,905
<TOTAL-REVENUES> 1,917,905
<CGS> 1,475,327
<TOTAL-COSTS> 1,475,327
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,805
<INTEREST-EXPENSE> 40,490
<INCOME-PRETAX> 295,611
<INCOME-TAX> 139,747
<INCOME-CONTINUING> 160,175
<DISCONTINUED> 0
<EXTRAORDINARY> 11,753
<CHANGES> 0
<NET-INCOME> 148,422
<EPS-PRIMARY> 1.44
<EPS-DILUTED> 1.42
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SONOCO PRODUCTS FOR THE NINE MONTHS ENDED SEPTEMBER 28,
1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-28-1997
<CASH> 30,398
<SECURITIES> 26,716
<RECEIVABLES> 359,839
<ALLOWANCES> 5,638
<INVENTORY> 245,788
<CURRENT-ASSETS> 713,162
<PP&E> 1,960,451
<DEPRECIATION> 918,231
<TOTAL-ASSETS> 2,409,710
<CURRENT-LIABILITIES> 499,360
<BONDS> 705,671
0
0
<COMMON> 7,175
<OTHER-SE> 871,407
<TOTAL-LIABILITY-AND-EQUITY> 2,409,719
<SALES> 2,111,403
<TOTAL-REVENUES> 2,111,403
<CGS> 1,639,879
<TOTAL-COSTS> 1,639,879
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,280
<INTEREST-EXPENSE> 42,420
<INCOME-PRETAX> 211,923
<INCOME-TAX> 81,865
<INCOME-CONTINUING> 126,111
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 126,111
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.20
</TABLE>
